Mass. program ties nonprofits’ pay to success

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Two groups of nonprofit social service providers have been selected by the state to tackle chronic problems with homeless people and juvenile criminals under an innovative new program that will reward the agencies if they can prove their techniques work, or pay them little or even no money if they fail.

The program, called Social Innovation Financing, operates on a simple “pay for success” model, in which nonprofits must demonstrate that by keeping youth from being reincarcerated or the homeless from living in costly shelters, they have saved the state money. Those savings are then shared with the program’s providers and backers.

The agencies will fund the upfront cost of their programs by borrowing money from foundations, philanthropists, and other investors, who will receive a portion of the additional payments from the state if these efforts succeed. If they don’t, the investors will likely be out their upfront investment.

The idea is to transfer the risk of failure from the state to the financial backers of nonprofits, and to insulate taxpayers from programs that don’t work.

“This has political appeal, because it’s both socially progressive and fiscally conservative,” said George Overholser, a former venture capitalist who founded Third Sector Capital Partners, a nonprofit financial advisory firm that will help oversee both programs. “That’s a real winner. People tend to love it on both sides of the aisle.”

Initial investors in the program will probably be philanthropists and foundations that want to see documented social progress as much as financial returns from their investments. “There will be profits, yes, but always at a very modest level,” Overholser said. “The returns are well below the market rate, compared to the risk.”

Earlier this year, the Legislature authorized spending up to $50 million on the initiatives, although the exact amounts for the homeless and juvenile offenders programs have not yet been determined.

The group tackling chronic homelessness is led by the Massachusetts Housing and Shelter Alliance, which represents nonprofit housing organizations that will provide housing and support services, such as medical care and vocational training. The group will try to raise the number of housing units it provides to around 600 from 220.

“We found that providing housing results in a drastic drop in the cost of serving this population,” alliance executive director Joe Finn said.

“The cost of shelters, ambulances, emergency room visits, all those different things, is actually higher than that [of a] house,” he added.

The youth recidivism group is being led by Roca Inc., a Boston nonprofit that each year works intensively with about 500 violence-prone young men leaving the probation or juvenile detention systems.

Molly Baldwin, the group’s executive director, said the shift to policies that reward measurable results is a refreshing change.

“We’re firm believers in outcome-based work,” Baldwin said. “If we can’t help young people change, we should do something else or not be in business, period.”

The social financing system is driven by two forces: First, new technology and data-collection efforts allow governments to more accurately measure the effects of policies; and second, the economic downturn has brought a more business-like mindset to the halls of power.

“We’ve got a new fiscal reality in government and we have to change the way we do business,” said Jay Gonzalez, the state’s secretary of administration and finance. “Especially in constrained times, you only have money to keep people in jails or shelters, which doesn’t improve outcomes. This allows us to get better results at a lower cost, and taxpayers only pay if we actually achieve those results.”

State officials and the social service agencies are still working out details on the contracts, including the all-important benchmarks that will be used to determine if each agency receives full payment for its results. The contracts will stipulate that agencies which fail to meet their goals will not be fully repaid for their work.

Officials in both government and at the nonprofits said their work is being carefully watched by other states and other countries considering similar programs. The social financing system has been used by governments in the United Kingdom and Australia, but the Massachusetts contracts appear to be the first of their kind in the United States.

“We don’t have a template to work from on this,” Gonzalez said. “We are trying to be thoughtful and deliberate, because there’s been lots of interest from other states and countries who are watching to see how we proceed,” he said.